Energy Insiders Throw Caution to Bears

February 22nd, 2012 by

Company insiders largely avoided buying their own shares during the 13-week period through February 10. The sector showing the lowest Insider Sell/Buy ratio is the Energy industry, and along with a few other reasons, that makes it one sector that you won’t want to bet against in 2012.

Table 1. Thomson Reuters Stock Reports + Sell/Buy ratios for S&P 1500

The table above shows the Thomson Reuters Stock Reports+ Insider Sell-to-Buy ratios for each S&P 1500 sector. Energy offers the lowest Sell-to-Buy ratio for each time frame scrutinized: the last four weeks, the quarter-to-date and the last 13 weeks.

We took a closer look at the XLE, a market-cap weighted liquid energy exchange-traded fund, and examined some proprietary StarMine indicators from a bottom-up point of view to identify candidates for investment that currently offer value. We found that there still exists a material difference in the five-year forecast growth rates of many companies in the energy industry.

Table 2. StarMine EPS Growth Analysis

Table 2 shows the 4 largest companies in the XLE, along with the XLE itself, and the S&P 500. We focused on growth and how the market is interpreting it. StarMine starts with analyst growth estimates, based on analyst forecasts, adjusts for analyst bias (analysts typically are over-optimistic about a company’s prospects), and then interpolates any missing data out to five years. The result is the StarMine SmartGrowth estimate.

The S&P 500 aggregate analyst SmartGrowth forecast is for EPS growth of 8.7% over the next five years. However, at current prices, the market is valuing stocks as if the S&P 500 will deliver 4.4% growth, for a difference of 4.3 percentage points. The Energy Sector ETF has a lower forecast growth rate of 5.3%, but a slightly greater growth expectations disparity of 5.0%. The four largest companies in the sector exhibit quite a difference between five-year “forecast” and “implied” EPS growth. One example is ConocoPhillips, which is in the midst of separating its refining operations from the rest of the business, and which has a 10.2 percentage point spread. Forward P/E ratios also look attractive relative to their 10-year median look, using the SmartEstimate as the “E” in P/E, in Table 3.

Table 3. StarMine SmartEstimate Forward P/E Analysis

Forward P/E projections for these companies indicate that they are trading at double-digit discounts to their long term median, except for ConocoPhillips, whose valuation is around its median. These names would make it onto the radar screens of value investors.

Finally, other factors besides fundamental analysis may provide impetus for energy company shares in 2012. These include:

  • Tension involving Iran and the Strait of Hormuz in the Persian Gulf shipping lanes will tend to keep oil prices stable to higher.
  • As corporate bond yields remain at historic lows, yield-hungry investors looking for will be drawn to energy stocks, most of which pay dividends
  • Investors view commodities, in general, as a hedge against potential future inflation.

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